Thursday, April 15, 2004
Joseph Hotz (UCLA) presents two papers at the UCLA Tax Policy and Public Finance Workshop:
1. “The Effects of the EITC on the Employment of Low-Wage Populations: Are the Apparent Effects for Real?” Here is the conclusion:
“The EITC transfers a large amount of money to working poor families and reduces poverty. There is also a considerable amount of evidence that the credit not only redistributes resources, but also encourages employment, thereby avoiding one of the negative behavioral incentives of traditional income transfer programs. Our paper develops new evidence that calls into question the incremental employment effect of the EITC. Ours is the first EITC paper to use data from tax returns to help examine the employment effects of the credit, and the first paper to use longitudinal data, which avoids potentially troublesome compositional issues that may arise from repeated cross-sectional studies based on the CPS or SIPP.
Before examining tax data, we show that employment for families with two or more children increases relative to one-child families, and the temporal pattern of these increase mirror, with a lag, relative increases in the EITC for larger families. The descriptive patterns in the data and the identification strategy for our regression work are similar to several previous studies that suggest the EITC increases employment of low-skilled families. However, when examining tax return data, we see little evidence of a similar increase in tax filing or EITC claiming among families with two or more children relative to one-child families. Moreover, the “EITC-like” employment patterns hold as strongly in a sample that does not claim the EITC as they do in the overall data. These two facts lead us to conclude that the EITC is not causing the relative employment increase of families with two or more children in these data.
To this point we have not been able to answer the puzzle raised by our paper. Namely,
while our data show patterns consistent with the EITC increasing employment, tax data make it
clear that the EITC is not causing the observed patterns. Several other papers based on the CPS
and SIPP claim that the EITC increases employment. We are now more skeptical of these results.
But we have considerably more to do to reconcile the results of our paper with previous work.
Our second major longer run task is to use statewide administrative data from California,
covering more than 3 million adults, to further explore the robustness of these EITC results, and
develop new information on the employment effects of local labor market developments, GAIN
and other welfare policy choices at the county level, and the way these interact with the EITC.”
2. “The Earned Income Tax Credit” (with John Karl Scholz).
